Insuring your health

July 15, 2016

What would happen if you couldn’t work?

By Brenda Spiering

Most of us don’t think of our income as our single biggest asset — but it is. Disability insurance is designed to protect it.

Toronto freelance writer, Caroline Cakebread was in her early 30s when someone she knew had a terrible accident while hiking: A rock fell on his head and he lost the ability to walk and talk. "Not only was he in the hospital for months," says Cakebread, "he was left permanently disabled and unable to work."

It made Cakebread wonder what would happen to her if she had an accident that took away her ability to work. "I began to wonder how I'd survive -- how I'd pay my bills? It was a wakeup call that inspired me to take out disability insurance."

What is disability insurance?

Financial expert, Jim Yih, of the Retire Happy blog, says, "Disability insurance protects your greatest asset, which is your earning power." It helps cover your loss of income by providing you with a monthly benefit if you're unable to work for a certain period of time due to an accident or illness.

Short-term disability is offered by some employers as a group benefit. It generally only covers you for the first 120 days of a disability.

Long-term disability, available both individually and through some employers' group plans, generally covers you from the 120th day (or other specified waiting period) to traditional retirement at age 65.

Who needs disability insurance?

Disability insurance isn't just for the self-employed like Cakebread. Even if you have group disability insurance coverage at work (often called LTD or long-term disability), you need to be careful to ask how a disability is defined, what conditions are covered and how much and how long you can expect to receive income.

Also, Worker's Compensation only covers certain types of workers and work-related accidents, so if you fall off your bike on the weekend and can't work for a long time, you may not be covered. Plus, unemployment insurance sickness benefits only cover up to a maximum of 15 weeks -- what happens if you can't work after it runs out? Disability insurance (along with other potential sources of income) can help to make ends meet if the need arises.

How does disability insurance differ from other insurance?

Disability insurance is often confused with two other types of insurance: long-term care insurance and critical illness insurance. The difference is that disability insurance covers loss of income for those under age 65, whereas long-term care insurance and critical illness insurance are designed to cover health-related costs:

Disability insurance pays a monthly benefit to help cover loss of income for those under age 65 who can't work because of an injury or illness.

Long-term care insurance can either reimburse your expenses or pay you a regular recurring benefit to help cover the cost of care you may require should it be determined that you have become significantly physically dependent or cognitively impaired and require care such as nursing care at home or a stay in a chronic care facility.

Critical illness insurance pays out a lump-sum to help cover costs should you be diagnosed with a serious illness or condition covered by your policy and you survive for the required period of time.

It's therefore important to consider your specific needs and life stage when choosing the combination of insurance that's right for you.

Cakebread says once she had her disability insurance policy in place she felt a lot better about riding her bike around Toronto. And now that she's a mother of two, she's considering increasing her coverage.

"The policy gives me peace of mind," says Cakebread, noting that she has also made sure to save a little extra money in an emergency fund to cover expenses over the first few months before her policy kicks in. "I definitely hope I never have to use the insurance -- but I'm glad I have it nonetheless."